MEASURING THE INCOME OF A NATION

I.1. THE ECONOMY’S INCOME AND EXPENDITURE

GDP measures two things at once: (1) the total income of everyone in the economy and (2) the
total expenditure on the economy’s output of goods and services.

For an economy as a whole, income must equal expenditure.

Figure I.1 The Circular-Flow Diagram

I.2. The measurement of GDP

Gross domestic product (GDP) = The market value of all final goods and services produced
within a country in a given period of time.

„The market value”

„of all” .........................

„goods and services” ...............................

„final”

„produced”

„within a country”

Gross Domestic Product (GDP) Gross National Product (GNP)

Includes the market value of all final goods Includes the market value of all final goods
and services produced within a country, and services produced by national firms /
nomatter who produces those goods and companies, nomatter where they produce
services. them.
„in a given period of time”

Why do we measure GDP?

1. we can compare countries (but we need to calculate GDP / capita);

2. we can make comparisons for the same country between two different
moments (we need tocalculate Real GDP = Nominal GDP / Deflator, Deflator is an
index price taking into account goods and services included in GDP)

Nominal GDP Real GDP

The production of goods and services The production of goods and services
valued at current prices. valued at constant prices.

Numerical example:

Year Pizza Hamburgers

Price (Euros) Quantity Price (Euros) Quantity
2020 5 100 3 50
2021 6 150 4 100
2022 7 200 5 150
Nominal GDP
2020 5x100 + 3X50 = 650 $
2021 6X150 + 4x100 = 1300 $
2022 7x200 + 5x150 = 2150 $
Real GDP
2020 5x100 + 3X50 = 650 $
2021 5x150 + 3x100 = 1050 $
2022 5x200 + 3x150 = 1450 $
GDP Deflator
2019 (650 $ / 650 $) x 100 = 100%
2020 (1300 $ / 1050 $) x 100 = 123,81%
2021 (2150 $ / 1450 $) x 100 = 148,28%
I.3. The components of GDP

1. the method of the added value;

We determine GDP by summing up all the added values created in an economy.

2. the method of the expenditures;

We determine GDP by summing up all the categories of expenditures.

GDP = C + I + G + NE
Net exports (X –
Consumption Investiţii brute Government M) = Spending on
(IB) (what private purchases (G) = domestically
(C) = what produced goods by
households secctor spends what local and foreigners (exports)
spend on goods on capital, central minus spending on
and foreign goods by
services, with the including what governments domestic residents
exception of (imports).
purchases of
households spend on public
spend on new goods
new housing.
housing)

- goods for long - gross fixed Public goods: = Exports -

term use; capital formation;
- nonexclusive; Imports
- goods for current - changing in
use; - nonrival.
stocks of working
- services. capital;

- We include
here the purcheses
of new houses;
- We do not
include here
financial
instruments such
as stocks and
bonds;
Gross
investments = Net
investments +
Depreciation
3. the method of the revenues

We sum up all the revenues which go to the factors of production:

Revenues for Revenues for Revenues for Revenues for

labour / work independent property entrepreneurs:
work

- Net wages; - gained by those - rents; - Profit distributed

individuals who through
- Taxes on - net interests. dividends to the
offers independent
wages; share;
services (they are
- other not employees, - Tax on profit;
expenditures but they work)
similar to wages - Reinvested profit
(that part of the
profit which is
not distributed
as dividends)

Revenues for Revenues for Net surplus of the operating activity

employees independent
work

GDPmarket value = Revenues for employees + Revenues for independent

work +

Net surplus of the operating activity + Depreciation + Indirect net

taxes

Calculation other macroeconomic indicators, starting from GDP:

NDP (Net Domestic Product) = GDP – Depreciation

National Income = Net National Product input value = GDP market value+
The value added balance abroad – Depreciation – Net Indirect
Taxes
Personal Income = National Income – Revenues which do not go
to population + Transfers to population
Available personal income = Personal Income – Other taxes
payed by population